Latest / Stagflation Conversations with Fexingo: High Inflation, Slow Growth, and 1970s Echoes / Why Your Car Loan Feels Like 1981 in a 2026 Economy
Transcript
- Lucas: So if you've glanced at an auto loan rate this summer, you know they're not subtle. We're talking high single digits for a new car, and for a used car, depending on your credit, you might be staring at something that looks like a credit card. Luna: And yet the Fed has been signaling for months that it wants to cut rates. So why is my car loan still pricing like it's 1981? Lucas: That's exactly the question. Because the short answer is, auto loans don't follow the Fed's short-term rate the way you'd think. They track the ten-year Treasury yield more closely, and that's been stuck around four percent even as the market prices in rate cuts. Luna: So the ten-year is the anchor, not the federal funds rate. Got it. But what's keeping the ten-year so high when inflation is supposedly cooling? Lucas: Look, core CPI is still creeping up — it hit 336.8 in July, up from 336.06. And the ten-year breakeven inflation rate ticked up to 2.28 percent. So bond investors are saying, we don't fully trust that this disinflation is durable. That keeps long-term yields elevated, and auto lenders build their pricing off that. Luna: Right, and there's also the spread on top of the Treasury. Banks and captives aren't lending at the ten-year; they're adding a couple hundred basis points for risk and profit. Lucas: Exactly. And that's where the stagflation angle gets interesting. With real GDP growth at just one point five percent annualized, wage growth is okay but not great, and job openings are pulling back — down to seven point three five nine million in June from seven point five three seven million. Lenders are getting more cautious about who they approve, and that caution is priced into the spread. Luna: So even if the Fed cuts in September, the ten-year might not move much, and auto rates could stay sticky. That's the 1970s echo — high inflation, slow growth, and credit that feels expensive no matter what the central bank does. Lucas: Precisely. And there's another layer: used car values. They've been falling from the pandemic peaks, and that matters because lenders price used-car loans based on the loan to value ratio. When the collateral is depreciating faster, they charge more to protect themselves. Luna: That's a good point. And it's not just the big banks. Credit unions are often the cheapest option, but even they've been raising rates because their cost of funds is tied to the same Treasury market. Lucas: So the whole ecosystem is synchronized around the ten-year, not the Fed. And that's why you see headlines about rate cuts and then you go to a dealership and the finance manager quotes you seven point nine percent and you think, wait, didn't they just cut? Luna: And the disconnect extends to the macro picture too. Unemployment is at four point one percent, which is still low, but initial jobless claims just jumped to two hundred nine thousand from two hundred thousand. So the labor market is cooling, just slowly. Lucas: That's the classic stagflationary soft patch. The economy isn't collapsing, but it's not growing with any vigor either. And in that environment, lenders get defensive. They tighten standards, they demand higher scores, they charge more to marginal borrowers. Luna: So who's actually getting a decent rate right now? Is it only the pristine 800-plus credit scores? Lucas: For the best rates, you're looking at something like six percent on a new car if you have excellent credit and a short term. But the average is much higher. For used cars, the average is probably pushing nine percent, and for subprime, you're in double digits easily. Luna: That's brutal when the average new car price is still around forty-eight thousand dollars. Even a small rate difference is thousands of dollars over the life of the loan. Lucas: Yeah, and that's why we're seeing more people stretch loan terms to seventy-two or eighty-four months just to keep the monthly payment manageable. But that just means you're paying interest for longer, and with used car values falling, you can end up underwater pretty fast. Luna: And if you're underwater and you need to sell, that's a problem. But let's talk about the captive finance companies for a second. Ford, Toyota, GM — they sometimes offer subsidized rates to move metal. Are those deals still happening in this environment? Lucas: They are, but they're much rarer and often limited to specific models or lease deals. Captives can use their own balance sheets to offer something like zero percent for twenty-four months on a slow-selling model, but they're doing that less because their cost of funds is higher and they're worried about used car residuals. Luna: So the subsidized rate is a marketing tool, not a trend. Got it. Lucas: Right. And the deeper issue is that auto loans are a cyclical business that's caught in a structural shift. The shift to electric vehicles is making manufacturers rethink residuals, and that uncertainty gets priced into every loan. Luna: It feels like the whole car market is in a weird place — high prices, high rates, and an uncertain transition. And I think a lot of our listeners are trying to figure out whether to buy now, lease, or just wait. Lucas: That's the real question, and it's not a simple one. If you can get a sub-6 percent rate from a credit union and you plan to keep the car for ten years, buying now might make sense. But if you're financing at eight percent and you're going to trade in three years, you're probably going to lose. Luna: And that kind of practical decision-making is exactly what we try to bring you every week. And you know, if you've gotten value from that, and you want to make sure we can keep doing this without ads, there's a simple way to support us. Lucas: Yeah, we keep the show ad-free, and that's only possible because a bunch of listeners chip in a few bucks. If you've ever found yourself nodding along to something we said and thought, that saved me a headache, you can head to buy me a coffee dot com slash fexingo and throw a couple dollars in the jar. Luna: It genuinely helps us keep the lights on and the research time funded. And no pressure, of course — but if you do, thank you. Lucas: Now, let's get back to that question of whether to wait. Because the interesting thing is, the bond market might give us a clue about where auto rates are headed. Luna: You mean the ten-year? You said it's been sticky, but what would make it break lower? Lucas: If we start seeing core PCE actually decline consistently — it's at one hundred thirty point three, up from one hundred thirty point zero nine — and if jobless claims keep climbing, then the ten-year could drop to three point five percent, and auto rates would follow by fifty to seventy-five basis points. Luna: But that's a big if, right? Because inflation is still above target, and the Fed doesn't want to ease too early and repeat the 1970s mistake. Lucas: Exactly. The Fed is haunted by the memory of easing too soon in the seventies and then having to slam the brakes again, which made things worse. So they're willing to tolerate a bit more economic weakness to make sure inflation is truly dead. Luna: So in the meantime, the consumer is stuck paying the price. And I saw a stat the other day that auto loan delinquencies are creeping up, especially among younger borrowers. That's a sign that the pain is real. Lucas: Yeah, I've seen that too. It's not a crisis yet, but it's a trend worth watching. If delinquencies keep rising, lenders will tighten even further, which could start a feedback loop — higher rates, fewer approvals, weaker car sales, more pressure on the economy. Luna: And that would hit the auto industry, which is already dealing with the EV transition and supply chain issues. It's a lot of balls in the air. Lucas: It is. And that's why we're not being alarmist, but we are saying, pay attention to your own situation. Know your credit score, shop around, and don't let the dealership's financing be your only option. Luna: Solid advice. And maybe check your local credit union first. They often have the best rates, and they're more willing to work with you if your credit is less than perfect. Lucas: Good point. And one more thing — if you're leasing, pay attention to the money factor, which is the lease equivalent of an interest rate. It's easy to overlook, but it can make a big difference in your monthly payment. Luna: So the takeaway here is that auto loan rates are stuck in this stagflationary mud, and they're not going to move much until the ten-year Treasury moves. And that might not happen until inflation is clearly, convincingly under control. Lucas: That's the long and short of it. And if you're in the market, you don't have to love the rates, but you can be smart about how you navigate them.